DP3649 Managers, Workers and Corporate Control

Author(s): Marco Pagano, Paolo Volpin
Publication Date: November 2002
Keyword(s): corporate control, employment protection, ESOPs, private benefits, takeovers
JEL(s): G34, K22, K42
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3649

If the private benefits of control are high and management owns a small equity stake, managers and workers are natural allies. Two forces are at play. First, managers can transform employees into a 'poison pill' through generous long-term labour contracts and thereby reduce the firm?s attractiveness to a raider. Second, employees act as 'white squires' for the incumbent managers: to protect their high wages, they resist hostile takeovers, by refusing to sell their shares to the raider or by lobbying against the takeover. The model is consistent with available empirical findings, and also yields new predictions.